TMI Blog2012 (11) TMI 1104X X X X Extracts X X X X X X X X Extracts X X X X ..... .91(Asr)/2011, I.T.A. No.89(Asr)/2011 - - - Dated:- 20-11-2012 - SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. B.P.JAIN, ACCOUNTANT MEMBER For the Appellant : S/Sh. Sudhir Sehgal Anil Miglani, Advocates For the Respondent : Sh. R.L. Chhanalia, DR ORDER PER BENCH ; These cross appeals of the assessee and the Revenue arise from the order of the CIT(A), Jalandhar, dated 31.12.2010 for the assessment year 2007-08. 2. The assessee has raised following grounds of appeal: 1. That the Ld. CIT(A) has erred in holding the action of the AO in rejecting the books of account and applying provisions of section 145(3) of the Income Tax Act, 1961. 2. That the Ld. CIT(A) while sustaining the rejection of the books of account has erred in ignoring the fact that the AO has rejected the books of account based on insufficient and inadequate material without pointing out any omission in purchases and sale or any specific discrepancy. 3. That the Ld. CIT(A) while sustaining the rejection of the books of account has erred in ignoring the fact that the books of account are duly audited by the Chartered Accountants and being an excisable unit, the complete stock and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal evidence in the shape of certificate from General Manager, District Industries\ Centre, Jalandhar about the claim of the higher burning loss on surmises and conjectures. 11. That the CIT(A) has also erred in estimating the sale value of Rods, Flats and of scrap without any justification and the basis of estimation of sale at ₹ 23,69,92,412/-, against the declared sale of ₹ 17,70,33,216/- and thus, the addition of ₹ 5,99,59,196/- is totally unjustified and unreasonable and against the facts and circumstances of the case. 12. That notwithstanding above said grounds of appeal, it is submitted that while making the addition of ₹ 17,31,59,753/- in the returned income, the AO has inadvertently taken the returned income at ₹ 9,29,133/- against actual nil income returned by the assessee and tax has been calculated u/s 115 JB of the Act. 13. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off. 3. The Revenue has raised following grounds of appeal: 1. That on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing relief of ₹ 117209656/- out of total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there were mistakes in the figures submitted before the AO by its accountant. It was informed that it did not use either induction or rotary furnace, but was carrying on rolling work by cutting the raw material into smaller sizes and heating and then rolling the same to the required sizes and that if, in the process, the finished goods got spoilt they were treated as scrap. It informed that the angles manufactured by it were sold to the Ministry of Defence, Govt. of India and its products were rejected even for small defects, which was then cut into small pieces and turned into scrap. The burning loss was claimed to be around 10% in the whole process. A fresh chart showing the consumption of raw material, production of finished goods and scrap, invisible loss etc. was submitted before the AO, which appears on page 4 of the assessee order and the same has been extracted at page 4 of CIT(A) s order. 4.3. It was stated by the assessee that during the earlier reply certain wrong figures had been given due to miscalculation by the accountant and that the new chart had been prepared to show the correct figures of raw material consumption and bifurcation of wages. The assessee submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks were not reliable. He rejected the book results u/s 145(3) of the Act. 4.5. The AO, thereafter, prepared another data chart D for the consumption of raw material using the information on material issued for production as per RG23A, which showed that only 6,358.945 MTS of raw material had been issued as against issue of 10,820.83 MTS consumption of raw material shown by the appellant in its earlier submissions, which revealed a difference of 4461.885 MTS of raw material. The AO noted that the scrap of 47.97% shown by the assessee was way above the industry norm and information collected by him from a rolling mill at Ludhiana revealed that in the production of rounds/flats production was 93% to 94% visible scrap generation was 3.90% to 4.10% and the invisible loss was 1.90% to 3.10%. The AO, therefore, adopted the figure of 4% as visible scrap generated and the invisible loss at 2.50%. The production of finished goods out of raw material consumption of 10,820.83MTS was computed at 10,117.480 MTS. 4.6. The AO also noted that the assessee had valued its closing stock of angle at a rate 11.89% higher rate than the average sale rate of Angles and closing stock of Rods was valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as far as deciding the present appeal is concerned. It was also observed by the Ld. CIT(A) vide para 6 that the figures of production of finished goods and visible scrap did not change in this new chart, but that of the invisible loss changes significantly. The assessee has claimed to have prepared the new chart based on a consumption register. This consumption register, a copy of which has been submitted to the Ld. CIT(A) has been impounded by the AO during assessment proceedings. The assessee also maintains excise records, which include records in Form No.23A part-1 containing the details of raw material received at the excisable unit, the amount of goods in stock and the amount issued every day for the purpose of production. A copy of the same was produced before the AO as well as before the ld. CIT(A). A month-wise comparison of the two figures of raw material consumption in MTS submitted by the assessee was prepared by the Ld. CIT(A) in Table-1 at page 21 of his order. The Ld. CIT(A) vide para 6.1 as per revised chart was of the view that the totaling error seems to be adding up only till the last month of the year and the accumulated error has increased to 735.623 MTS till M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finally observed vide para 7.6 of his order that he is of the opinion that explanation of the assessee to justify the huge generation of scrap is incorrect. He further observed that he believes that at least some of the scrap generated was recycled in its own factory. Accordingly, he accepted AO s contention that the quantity of scrap shown as generated was inflated. 8. As regards the estimation of sales made by the AO on the basis of information collected by the AO from M/s. Mukesh Steels Ltd. without confronting the assessee, the ld. CIT(A) was of the view that section 142(3) of the Act specifically requires the AO to confront the assessee with any information he has collected and wants to use for the purpose of assessment before using the same. The AO has, therefore, violated the principles of natural justice and accordingly Ld. CIT(A) relied upon the decision of the Hon ble Apex Court in the case of Kishinchand Chellaram vs. CIT 125 ITR 713 (SC). The Ld. CIT(A) was of the view that AO was not entitled to use any information collected from a third party for the purpose of assessment unless the assessee has been confronted with the same and therefore, the AO was not justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing requirement in the case of the assessee s rolling mill, since the raw material is not melted, should ideally result in lower burning losses. However, in the absence of any other evidence, the burning loss is accepted at 10% for the entire year as claimed. 8.4. As regards the claim of rejections, the excise register itself shows some rejection which have been reused. Hence, the claim that there were rejections of angles is acceptable to some extent. It is also noted that the assessee was actually re-using some of the rejections. Hence, all the rejections cannot be said to result in generation of scrap. The visible scrap generation in a both an induction furnace and a rotary furnace was noted by the AO to be in region of 2-3% in his shown cause notice, which the assessee countered by claiming that its furnace was not a rotary or an induction furnace, but was a regular furnace in a rolling mill and that scrap was high due to rejections by DGQA. M/s. Mukesh Steels Ltd. have a heating furnace and rolling mil and have reported visible wastage in the form of end cuttings to be 3.90 to 4.10%. In my opinion, considering that some angles were being rejected as per excise register on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate the large quantities of scrap claimed to produced. The corollary to this conclusion is that the sales of scrap shown by the assessee are actually inclusive of sale of some finished products also. 8.6. In the case of Vikas W.S.. (P) Ltd.. vs. CIT 307 ITR 304 (P H), the Hon ble Jurisdictional High Court have held that though no doubt during assessment the burden was on the department to show taxability of income, but for discharging that burden it was not necessary for the Department to lead evidence. It was held that on the principle of section 114 of the Evidence Act, the AO could presume the existence of any fact which he thinks likely to have happened regard being had to common course of natural events, human conduct and public and private business in their relation to the facts of a particular case. It was held that if such a presumption was justifiably raised, the assessee may be required to rebut the same. The addition on account of transfer of raw guar gum splits at lower than market rates made by the AO, as upheld by the CIT(A) and the ITAT, was upheld by the Hon ble High Court. In the present case, the AO has made the addition on the ground that the percentage of ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with Central Excise department and maintaining statutory records and one such register, namely RG-23 is placed at pages 97 to 117 of all the items and for certain period from 19.09.2006 to 16.11.2006, the computerized record of RG-23 register are maintained and placed at pages 62 to 74 of the paper book.. iii) R.G.-1 Register in which day to day stock of each and every item manufactured namely angle, Rod, Scrap and flat, and which is placed at pages 118 to 153. iv) All purchases and sales are fully vouched and all the entries with regard to the purchase and sale of finished items and also scrap sales are to the identifiable parties and all such transactions have been made by account payee cheques. v) All payments for the purchase and receipts in respect of sales are through normal banking channels and three are no cash sales of any item, including scrap. vi) The return was filed on the basis of audited books of accounts as per copy of the computation of income alongwith complete audited set have been placed in the paper book at pages 6 to 45 of the paper book. vii) No defect in day to day maintenance of books of accounts, different stock register,RG-1 Register fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and the CIT (A) had not been able to find any fault in the revised figures of consumption which are based on the day today manual consumption of raw material record. 3 The again reference is invited to page No. 8, para-4 of the order of CIT(A) on this issue and even the Assessing Officer had committed number of totaling mistakes and, thus, conclusion drawn by the Assessing Officer for rejection of books of accounts and consequent making of huge addition on the basis of wrong figures is uncalled for. 4 Before the CIT(A) our submission on this issue have been contained in paras 3 to 6, pages 6 to 9 of the order. 5 The finding of the CIT (A) on this issue of consumption figures is at para 6.1 read with para8.1, at pages 21 and 29 of the order respectively. The finding of the CIT(A) is contradictory in the sense that in para 6.1 at page 22, he has stated that Assessing Officer has rightly not accepted the calculation error and, whereas, in para 8.1 starting from page 29 and at page 30, he has given a finding and even if no direct defect is found in the entries recorded in the books, then addition can still be made on other factors, like higher wastage or law yield. 6 Thus, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the manufacture of Angles, which are manufactured only as per exact specification from Ministry of Defense , Govt. of India and there could not be nay various in such specification of the manufacturing product. This was the first year of the orders having been received from Defense Department through their registered supplier and, as such, certain items could not be made of exact specification and due to heavy rejections, the supplies to the Defense department were stopped in the subsequent years. This was the 1st and last year of supplies of Defence. iv) The total production during the year under consideration in respect of different items was to the tune of 4546.831 M.T., out of which 2495.296 M.T. related to the production of Angles which constituted about 55% and because of the fact that, it was the first year of manufacturing of goods as per the specification of Defense department certain goods as per the specification of Defense department certain goods could not be made according to their specification and, as such, there were heavy rejections and such rejections were then cut into small sizes and sold in the market by weight as the rate of scrap since, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder :- Now, the question is regarding estimating the income on the basis of these loose slips. In our opinion, the Assessing Officer is not justified in estimating the sales on the basis of loose slips without substantiating that the assessee has actually made the sales to that extent of estimation made by the Assessing Officer and having no iota of evidence in the form of sale bill or bank account or movable and immovable property which represent earning of unaccounted income by the assessee. As such, the Learned CIT (A) to that extent is justified in holding that estimation of sales on the basis of loose slips represented payment of wages is not possible Then again in para 11, page 13, it has been held as under :- To sum up, the appeals are aside to the file of the Assessing Officer for limited purpose of considering the wages recorded in the loose slips and not to make addition on the basis of estimation of sales and limit the addition u/s. 69C of the Act only to the extent wages payments which is not reconciled with the books of accounts maintained by the assessee. d) The finding of the CIT (A) in this aspect is in pare 8.4 and while upholding part of the add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally on estimation without there being any cogent material on record and which finding deserves to be quashed, specially on the basis of judgment of the Jurisdictional Bench in the case M/s. Atam Valves Pvt. Ltd. Here, there is no evidence of wages outside the books and merely on heavy rejections, the estimation of sale is not proper. h) The finding of the CIT(A) that the assessee could reuse the rejection for the purpose of manufacturing is again a finding which is not corroborated by any evidence because the assessee does not have any furnace and only negligible portion of the rejections have been used, that too which arises from the first stage of production since rest of the rejections can not be used by the assessee. Thus, the finding of the CIT (A) in para 8.4 at page 31 about the generation of scrap of induction furnace or Rotary furnace and also reusing of scrap is not correct and it is against the factual facts and circumstances. i) The finding of the CIT (A) in para 7.3 about the higher generation of scrap in some months lead only to suspicion in the mind of the CIT(A), without there being any cogent material on record and it is being submitted that besides the Ang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.1 It is pertinent to mention here that the AO in the present case has not pointed out any defect in the purchases, sales, opening stock and closing stock. The AO on the basis of records submitted before him and explanation given thereto has opined that the scrap generated is at 4%, which is an estimate by the AO as compared to 47.97% claimed by the assessee. Also the burning loss has been estimated by the AO at 2.5% as against 10.005% claimed by the assessee. The detail of the consumption and production submitted by the assessee initially as compared to Data chart A at page 2 of the assessment order was furnished as required by the AO. Since certain mistakes crept in as explained by the assessee during the assessment proceedings itself, the same was amended and the amended chart of the production and consumption was produced, which is available at page 4 of the assessment order. The assessee had submitted the explanation for wrong chart having been prepared due to miscalculation by the accountant which was inadvertent In support of the revised chart as well as earlier chart in which mistakes had crept in, the assessee had produced books of account, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained a computerized Form RG23A Par-1, Register. Copies whereof were given to the AO in a separate file alongwith the other vouchers books of account, which is a matter of record and cannot be denied. The AO has not considered totals of raw material purchased and issued during these three months in Data Chart D . The AO has not considered many other items which have been referred by the assessee in his explanation available vide paras 8, 9, 10, 11 12 at pages 10 to 12 of Ld. CIT(A) s order. 13.4 It was also submitted and explained by the assessee time and again that the assessee has special product which is sold through approved parties to the Govt. of India, Ministry of Defence, which are minutely inspected by the Officials of the Defence Department, Govt. of India and as such there is a lot of rejection. The rejected goods had to be cut into small pieces and have to be sold as scrap only. Such rejected goods for the security reasons of the nation cannot be sold as a matter of agreement and as a matter of rule of the Defence Department, Govt. of India. It was stated by Mr. Sudhir Sehgal, the ld. counsel for the assessee that such iron angle rods are sold by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd; Jalandhar vs. Income Tax Officer, Ward II(3), Jalandhar, in ITA No.442(Asr)/2008 for the assessment year 2005-06, dated 30th Dec; 2008. The said order of the Tribunal stated to have been confirmed by the Hon ble Punjab Haryana High Court in IT Appeal No.358 of 2009 vide its order dated 22nd July, 2009 reported in (2009) 184 Taxman 6 (P H). In the facts and circumstances of the case and to repeat our decision, the learned CIT(A) is not justified in confirming the invocation of provisions of section 145(3) of the Act and no additions can be made accordingly, as discussed hereinabove. Thus, grounds No. 1 to 11 of the assessee are allowed and all the grounds of the Revenue are dismissed. 14. In ground No.12, the ld. counsel for the assessee had argued that the assessee has filed Nil returned income whereas the AO while making the computation had taken the returned income at ₹ 9,29,133/- and it is apparent from the record. 15. On perusal of the facts, it has been observed that the assessee had filed nil income and the AO has taken computation of income wrongly as income declared by the assessee at ₹ 9,29,133/- at page 14 of his order. The AO is directed to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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